Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Nov, 1987, Volume 55, Issue 6

Forward Exchange, Futures Trading, and Spot Price Variability: A General Equilibrium Approach<1433:FEFTAS>2.0.CO;2-V
p. 1433-1450

Makoto Yano, Paul Weller

We investigate the effect of opening a forward or futures market on spot price or real exchange rate variability in a two-agent, two-good, two-state general equilibrium model. We derive a linear approximation to the change in spot price variability which results from opening such a market. This is shown to depend upon such familiar parameters as substitution elasticities, marginal propensities to consume, and degrees of risk aversion. Our analysis highlights the importance of the income transfers which occur as a result of capital gains and losses in the forward market. We find that there is some presumption in favor of the view that opening a forward market reduces spot price variability. The presumption is strengthened the less risk averse are agents.

Log In To View Full Content